The rental of real estate in Germany is generally taxable. This also applies in the event that the owners are only subject to limited taxation in Germany. Nevertheless, the option to rent German properties from abroad opens the door to tax-free income. Here we present three ways in which German real estate can be rented tax-free from abroad. The first approach takes place as a private person, the second through a foreign corporation and the third even Fix & Flip transactions with German real estate are tax-free.

1. Renting German properties from abroad – Introduction

Usually, when discussing real estate lettings, we consider the tax relationships that arise under German tax law. After all, we are technically largely focused on local tax law. But in this article we want to look at how renting German properties from abroad has a tax impact. Because renting German properties from abroad can offer amazing advantages.

2. Renting German properties from abroad: starting point

In order to provide a framework for our tax considerations, we first describe the starting situation. Let’s assume that Mr. Walter Welt, who emerged from our fiction, has a liquid asset of EUR 20 million and thus moves abroad. There he looks for ways to invest part of his assets. Since he has a certain affinity for real estate, it is clear to him that this should be his investment goal. The question is where?

In the country where Walter Welt now lives, taxes are relatively low. This is a good starting point. However, only a very low rental yield can be expected there.

On the other hand, Walter Welt could also look for suitable properties in Germany. Here often beckons a higher return than abroad. But what about the high taxes in Germany? Due to the location principle, which is the basis for the allocation of the taxation right in most double taxation agreements, Walter Welt has to expect an income tax in the area of the top tax rate or rich tax rate. That would be an income tax rate of 42 or 45 %. And yet, after intensive consultation in our law firm, he decides exactly for this option. Why?

3. Renting German properties from abroad: our design

Because we were able to show that he can make his rental income in Germany practically tax-free. And this is how it works:

Let’s say Walter Welt founds an LLC in Malta and deposits EUR 12 million. Now he can search in Germany for a property that yields a return of 5%. For this he expects the regular depreciation rate of 2 %. From his private assets, Walter Welt wants to invest EUR 3 million in the real estate purchase. He intends to receive the balance as a loan from his LLC. For this purpose, he can assume a foreign interest rate of 4 %. We want to dispense with the consideration of purchase costs and real estate acquisition tax in order to simplify the presentation at this point.

Acquisition of real estate in Germany with a loan from Malta LLC

Now there are three ways to make the investment. In this first case, Walter Welt has a total of EUR 15 million available for the purchase of real estate. The return is therefore EUR 750,000. The depreciation of EUR 300,000 leaves EUR 450,000. But also the interest costs that flow to the LLC in Malta must be taken into account. They make up another EUR 480,000. All in all, this results in a tax loss of EUR 30,000. There is no tax on that. On the contrary. If Walter Welt ever has to tax other income in Germany, which he, unlike capital income, is allowed to offset against losses from renting and leasing, then the losses even help him to optimize this income for tax purposes.

Now you may wonder how such an investment should pay off in the end, if you constantly generate losses. That is what we want to explain. To do this, we calculate the actual flow of money:

Revenue EUR 750,000 – EUR 480,000 interest = EUR 270,000 actual cash flow at private level

This means that Walter Welt generates a surplus of EUR 270,000 when renting a German property from abroad. In the overall analysis, we have not yet taken into account the interest that his LLC receives. This inflow then amounts to a further EUR 480,000. With a suitable design, Walter Welt can also distribute this profit tax-free from his LLC.

In the end, Walter Welt can look forward to tax-free EUR 750,000. The reason for this is on the one hand that the depreciation is only relevant for tax purposes, but has no significance in the calculation of the cash flow. On the other hand, the interest payments are also relevant for tax purposes only as advertising costs for the rental. Because the interest for the LLC is taxable only in Malta instead of Germany.

3.2. Acquisition of real estate with loans from a German bank

Now let’s say Walter Welt finds a property that recognizes a great opportunity, even if the return is also 5%. But the object is a few dimensions larger than in the previous example. So Walter Welt needs more capital. For this purpose, his real estate LLC is negotiating with German banks for a loan that will contribute 80 % of the purchase price as debt capital. In fact, he gets the loan. But how can he now use the equity for tax purposes most favorably?

For this purpose, he founds a second LLC as a sister company to his existing real estate LLC. This first LLC is to purchase the property with its capital and the debt capital from the bank loan. In addition, Immobilien-LLC takes out another loan for 20% of the purchase price from its sister company. This is, since it is a subordinated loan, with a significantly higher interest rate. Thus, when taxing income from renting and leasing, one expects interest on two loans as financing costs. This in turn leads to a tax loss instead of a profit in the end. And now we are again in the same situation as in the previous example: Walter Welt can rent a German property from abroad via the Immobilien-LLC – tax-free.

Fix & Flip with Real Estate LLC Abroad

As a third example, let’s assume that Walter Welt wants to use its real estate LLC as a vehicle for Fix & Flip transactions. The LLC would regularly pay corporation tax and business tax in Germany, i.e. about 30 % of taxes. With the sister LLC, we can also take into account financing costs, which, in addition to depreciation, help to make the income from the rental tax-free. When renting German properties from abroad, there is a lot of potential for tax optimization.

4. Renting German properties from abroad – Conclusion

So let's get to the bottom line. The question we want to answer here is whether you can rent German properties from abroad tax-free. And the answer is clearly yes. Both when renting out of private assets and via a real estate corporation, you can significantly reduce the German tax, avoid it altogether or even generate a loss, which you can then offset with other income. But even with Fix & Flip businesses, this is possible. It should be noted, however, that the interest income on the part of foreign corporations in the respective country triggers as low as possible, ideally even no taxes. In addition, the creation of new losses is a nice side effect. Nevertheless, the loss carry forward is likely to grow considerably over the years, so that one day it can be used to save massive taxes in Germany.

For all these reasons, when moving abroad, we also recommend keeping an eye on investing in German real estate as an option – it can be worth it!